Magical Science of Product Pricing

In this article about “things that make a highly successful Product Manager” we’re going to talk Pricing.?Which must be everyone’s favourite topic because everyone always has an opinion.

Having priced over a hundred new products I’ve learned a few tricks to help set pricing that succeeds.

Understand the Review & Approval Process

It’s unlikely you as PM will have final say on product pricing.?A highly successful PM will understand the pricing approval process and have a plan to approach it.

Usually this means you should define several price recommendations such as different models or aspects that can be tuned up or down, or even eliminated.

At a minimum you should expect to review pricing with Sales, Marketing and Finance.?And in some organizations it may elevate to the ELT.

Pricing is a Sales Enabler

Remember that your product pricing and price strategy needs to support sales.?This means it should be clear, concise and simple; but still open for adjustment (discounting).

The natural default in many organizations is to maximize revenue potential by monetizing as many aspects of a product as possible.?For example, disk use or network data transfer along with API calls and a price-per-user.?

But remember – too many options can create confusion.?And when a customer is confused about what it’s going to cost them, they can’t budget or plan.?This turns your pricing model into a barrier to sales success, not an enabler.

Cost-Based vs Value-Based

Following a cost-based model is easy but unlikely to be successful.?In the cost-based approach we add up all our internal costs (engineering, marketing, sales, support, 3rd party, etc.), add a margin like 30% and declare “done.”?Where this model fails is in not accounting for the value your solution provides to your customers – it’s almost always leaving money on the table.

Whereas a value-based model takes more work but will mean more revenue and high profits to your business.?In a value-based model we need to understand how our product impacts our customers bottom line – new revenue or cost savings, and add a margin to that.?And it should be a high margin because discounting is a fact of life.

Understand Your Costs

We know we need to be simple and transparent, and that we want a value-based model.?And that makes it critical to understand our costs – whether internal, 3rd party royalties or cloud services – for two critical reasons:

1. Profitability – depending on the company growth stage you may not be immediately profitable.?But you have to understand your path to profitability and that means having costs measured.
2. Protect Against Abuse – customers can willfully or accidentally take advantage of your product.?For example, if your solution is hosted in Azure there are charges for data storage and transfer, a customer can quickly be costing you if you don’t protect yourself.

External Verification

You’re not alone in the pricing journey, so use the network effect to your advantage.?Work with industry analysts to make sure your model, approach and list pricing is reasonable for the market and in-line with the competition.?

Use public sources of information like GSA or other European publications.?And of course don’t forget to check the Azure, Google and AWS marketplaces.?

If at all possible, find a lighthouse customer you can trust to provide feedback.?Nothing beats real world commentary.

Golden Rules

Like so much a highly successful PM does, Pricing is a mix of art and science.?There’s no perfect approach or plan.?But there are some golden rules to remember:

1. Be ready with options for price points and models
2. Document your road to profitability
3. Remember you can discount, but it’s almost impossible to raise prices
4. Protect yourself, especially with cloud offerings, from abuse
5. View it through your customers eyes, make sure it’s understandable

Good luck with your pricing journeys!??